Is the country really equipped to deal with the retirement income problem?
Faced with increasing longevity risk, an aging population, and economic uncertainty on the horizon, the problem of retirement income planning is becoming increasingly top-of-mind for countless plan members.
But even with its reputation as a forerunner in investment product innovation, the Great White North is still woefully under-equipped to meet the challenge of decumulation, according to one top advisor.
“The reality is that there's little to nothing out there,” says Jason Pereira, financial planner at Woodgate Financial. “The only real options are single-premium immediate annuities and non-guaranteed tontines.”
Pereira argues that compared to Canada, the US financial industry offers far more options for guaranteed retirement income. That’s partly due to the US tax code, he explains, as it allows far more favourable tax treatment of variable annuities than what Canadians could expect for segregated funds, which are the closest equivalent product in Canada.
Effective January 2020, the federal government changed tax rules to allow advanced life deferred annuities (ALDAs) to be a qualifying annuity purchase from certain registered plans. As the name suggests, ALDAs give the annuitant the option to delay their annuity payments, though the payments must be started before the year in which the annuitant turns 85.
But after several years of that legislation being passed, Pereira notes, insurers have yet to launch an ALDA for use in registered plans. “This is a proven market. The ALDA is an almost-100% carbon copy of QLACs [qualified longevity annuity contracts] in the US.”
While many advisors across Canada already style themselves as experts in retirement income and decumulation planning, he argues that the general understanding of quantitative methods to effectively model decumulation is “borderline non-existent” across Canada’s advice industry, with most retirement income conversations being addressed through dividends and other traditional investment strategies.
“I talk to advisors at conferences in the US, and there's so much debate about different modelling and drawdown scenarios, specialized software, Monte Carlo analyses, and all these other methods to try and optimize around retirement income,” he laments. “Most banks won't even provide their advisors with the option to use Monte Carlo analysis to stress-test their portfolios.
“For the most part, we’re modelling straight-line assumptions, which do not communicate the risks that are happening in reality,” he says. “If you're not even modelling for how a decumulation plan could go off the rails, that how are you actually dealing with longevity risk?”
While he considers single-premium immediate annuities “great products” for retirement income, Pereira argues they’re massively undersold partly because of the incentives around them: the recommending advisor gets a one-time commission, rather than an ongoing fee.
Canadians are all for the idea of pensions and guaranteed income in retirement, he says, but many clients have difficulty with the idea of “cutting what is probably the second-biggest cheque in their lives, next to buying a house, to an insurance company.”
And while tontines could very well be the radical retirement-income innovation that Canadians need, Pereira says they still have to overcome the reality that they’re still new and have yet to prove their effectiveness.
“They need to survive long enough for people to see them work. People need to see these tontines deliver returns that are comparable to the market, and see how the mortality credits can add to their individual returns. Imagine opening your statement to see they added 3% to your return and knowing that number will go up the longer you live,” he says. “I would love to see the insurance companies step up with more solutions like these. …. They have the ability to make all this, but no one's rising to the challenge.”
